Summertime Advice for Managing Your Taxes

Summer is a great time to kick back and relax — just don’t plan on taking a vacation from tax planning. Since many tax strategies take time to implement, don’t miss this opportunity to take stock of your situation and put a plan into action, advises the California Society of CPAs (www.calcpa.org).

Many valuable tax breaks, including the child tax credit, the education deduction and credits, and the earned income credit, are phased out for individuals with adjusted gross incomes (AGI) above certain levels. If your estimated AGI this year will exceed the ceiling for a tax break, don’t give up just yet. By starting early, you may be able to apply some of the following strategies to lower your AGI and become partly or fully eligible.

Bunch DeductionsOne option to consider is alternating between claiming the standard deduction one year and “bunching” deductible expenses into the year you itemize. For example, if you estimate your 2005 itemized deduction are likely to be just over the standard deduction amount, you may want to move or “bunch” more itemized deductions into 2005. (The standard deduction amounts for 2005 are $10,000 for married filing jointly, $7,300 for heads of household, and $5,000 for single filers and married individuals filing separately.)

Bunching refers to timing your deductible expenses so they are higher one year and lower the next. For example, in the year you plan to itemize you can boost your mortgage interest expense by making your January mortgage payment in December or make charitable donations planned for future years. Apply this strategy to other deductions subject to AGI-based limits like medical expenses and miscellaneous itemized deductions.

Contribute to a Retirement Plan
Unless you’re putting the maximum allowable amount into your 401(k) plan, examine your budget to see if you can increase your contribution. This can reduce the income tax you currently pay, and help to ensure a secure retirement. If you don’t have a retirement plan at work, you may be able to deduct your contributions to a traditional IRA.

Many people wait until April to make IRA contributions. But it may be easier to fund your plan with monthly deposits during the year, rather than coming up with the entire amount at once. This method gives you the added benefit of dollar cost averaging. And the sooner you put money in a retirement account, the sooner you start earning tax-deferred interest.

Offset Gains with Losses
Summer is a good time to review your portfolio for investments that are underperforming. When you realize a loss on the sale of stocks, bonds, or mutual funds that you have held for more than a year, you can deduct those losses against realized capital gains. If total losses exceed total gains, the excess amount can be used to offset up to $3,000 of ordinary income ($1,500 for single filers). Of course, you should never base investment decisions solely on tax considerations.

Convert Non-Deductible Interest
Now is a good time to consider whether it might make sense to convert non-deductible interest into a tax break by applying for a home equity loan. You can use the proceeds to pay off your high-interest credit card balances and, in most cases, fully deduct the interest you pay on home equity debt.

Meet with Your CPA
Many people wait until tax time to meet with a CPA. But the “off season” is the best time to sit down and discuss tax saving strategies. Bring your CPA up to date on any life changes, such as getting married or divorced, buying a house, having a child, or paying college tuition. This way, you can work together to develop an appropriate plan.